What is a 'Multilateral Trading Facility - MTF'

A multilateral trading facility (MTF) is a European term for a trading system that facilitates the exchange of financial instruments between multiple parties. Multilateral trading facilities allow eligible contract participants to gather and transfer a variety of securities, especially instruments that may not have an official market. These facilities are often electronic systems controlled by approved market operators or larger investment banks. Traders will usually submit orders electronically, where a matching software engine is used to pair buyers with sellers.

BREAKING DOWN 'Multilateral Trading Facility - MTF'

Multilateral trading facilities (MTFs) offer retail investors and investment firms an alternative venue to trading on formal exchanges. Prior to their introduction, investors had to rely on national securities exchanges like Euronext or the London Stock Exchange (LSE). Faster transaction speeds, lower costs, and trading incentives have helped MTFs become increasingly popular in Europe, although the NASDAQ OMX Europe was shut down in 2010 as MTFs face intense competition with each other and established exchanges.

MTFs have less restrictions surrounding the admittance of financial instruments for trading, allowing participants to exchange more exotic assets. For example, the LMAX Exchange offers spot foreign exchange and precious metals trading. The introduction of MTFs has led to greater fragmentation in the financial markets since a single security may now be listed across multiple venues. Brokers responded by offering smart order routing and other strategies to secure the best price between these many venues.

Some investment banks - which were already running internal crossing systems - have also converted their internal systems into MTFs. For example, UBS established its own MTF that works in conjunction with its internal crossing systems, while other international investment banks plan to launch their own MTFs as well. These investment banks have greater economies of scale to compete with traditional securities exchanges and could realize synergies with their existing trading operations.

In the United States, the equivalent of MTFs are known as Alternative Trading Systems (ATSs). These ATSs are regulated as broker-dealers rather than exchanges in most cases, but must still be approved by the Securities and Exchange Commission (SEC) and meet certain restrictions. In recent years, the SEC has intensified their enforcement activities surrounding ATSs in a move that could spill over into MTFs in Europe. This is especially true for dark pools and other ATSs that are relatively obscure and difficult to trade and value. The most widely known ATSs in the United States are Electronic Communication Networks - or ECNs - that facilitate orders.

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